The purpose of the EKTAN is to provide intellectual food for thought on business strategy, technology, and current events, primarily in the wireless area. I am also available for more in depth consulting assignment in the telecom space. I'm currently consulting on projects and subjects that include: iDEN and CDMA technology, Nextel International, Sprint Nextel (without revealing any non-public or proprietary information), Alcatel-Lucent, and Motorola, and wireless industry dynamics, metrics and trends.

Important Info

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Redistribution or reuse of this document, or any part of it, is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 559 Nathan Abbott Way, Stanford, California 94305, USA. Attribution must include the following three lines:
Copyright 2008 by Ed Ketchoyian
Some Rights Reserved under Creative Commons License
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Any personal information that I have about you, including your name, email addresses, contact info, will remain private. Period. An exception to this policy is if you explicitly authorize publication of your name and / or content in the EKTAN or the EKTAN Blog.
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NY Mets Facts or Trivia

George Herbert Walker, Jr., an uncle of President George W. Bush, was vice president and treasurer of the Mets from their founding through 1977.
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Answer to question below: Sid Fernandez.
What 16-game winner was relegated to bullpen duty by Manager Davey Johnson during the 1986 World Series?

April 18, 2008

Sprint Nextel Watch: Going Long on Sprint: A Fool's Folly or a Shrewd Investment?

Based on the intrinsic value of its spectrum holdings and its business operations, Sprint is still a steal at its current market cap.

Analysis

A recent article by Ben McClure in response to my blog post suggesting circling sharks around a wounded and bleeding Sprint reasoned that at the current market cap of around $18B and $6 and change a share this stock is not a good investment for bottom fishers. Mr. McClure writes:

"At a share price of $6.76, the company has a market capitalization of about $18.8 billion. Let's assign to Sprint Nextel a forward PE ratio
of 16, about the same PE ratio attached to Verizon. Based on that
multiple, Sprint Nextel will have to produce about $1.2 billion net
income or an EPS of
41 cents per share in 2008 if share prices remain constant. Yet, Wall
Street earnings estimates say that this number is well beyond reach.
Analysts say the company is on track to produce just 8 cents per
share in 2008 according to Market Watch."

Clearly, by this reasoning, Sprint, at a PE ratio of 16 and earning of 8 cents a share would indicate a share price of around $1.25. The underlying argument is that there's still substantial downside risk to Sprint. If Sprint were to go as low as $1.25 a share, this would equal a market cap of $3.5B! I'm sure one could construct an argument for the share price going even lower by adjusting the PE ratio to, say, 12, to reflect that Sprint underperforms relative to its peers.

Another calculation, though, would set Sprint's value much higher, looking at the piece parts. A rough calculation valuing Sprint's spectrum holdings at $1 per MHz - pop for iDEN spectrum at 800 / 900 MHz, $.75 per MHz - pop for PCS spectrum at 1.9 GHz, and $.50 per MHz - pop for WiMAX spectrum at 2.5GHz, easily yields an intrinsic value of over $10B. By being even more conservative and downgrading the value of Sprint's spectrum holdings by 20% to $8B still leaves one to argue that, with current debt being factored in, the remaining bricks and mortar, equipment, iDEN, long distance and IP / wireline, CDMA and WiMAX businesses together are worth only $8 - $10B at the current stock price.

By my reckoning, the depressed stock price is in large part due to historically and entrenched (below the current CEO) decision making, leadership and management, manifested in customers so dissatisfied that they leave the network, despite network quality and reliability being good. On the iDEN side, dissatisfaction is compounded by ongoing uncertainty of iDEN in Sprint's long term architecture (iDEN has no evolution to broadband), despite well intentioned and genuine best efforts on the part of CEO Dan Hesse to reassure customers that iDEN will be around for the foreseeable future.

Sprint, in the eyes of investors and customers, at this point has approval ratings like the Bush Administration: They have screwed up in such an extreme manner for so long that the negative sentiment has become so deep-rooted that it's hard to see how any recovery is possible.

In the case of Sprint, though, it really is hard to see how conditions can get worse. Hesse has already prepped investors' expectations by forecasting a large subscriber loss for first and second quarter, 2008, as iDEN continues to bleed perhaps unprecedented subscribers in the wireless industry.

Sprint does not have timeto wait for Qchat to become operational over the next year. Sprint also doesn't have time to wait for the WiMAX build out to mature over the next three years. I believe that Hesse understands this situation.

The short term key is iDEN. The problems on the iDEN network are exacerbated when you realize that when subscribers churn off, they don't do it in one's or two's at a time, but in groups, due to the unique group call capability of push-to-talk that business customers love. An optimist would see though that group calling is still a differentiated technical capability that Sprint controls with iDEN and Qchat, and that, if Hesse is able to turn around iDEN, then the heavy churn can drop as dramatically as subscribers choose to stay in groups instead of leaving.

ConclusionWhen looking into the abyss, it's easy to imagine an infinite drop into the darkness. On the other hand, the drop may only be a few feet. I believe iDEN will stabilize before the end of 2008. When that happens, the emotion depressing Sprint's stock price will burn off and the price will bounce back. So, for now, if a suitor can put together the financing in the current credit environment, now is the time to acquire Sprint. I'm reaffirming my previous position that Sprint is a steal at its current market cap.